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For Health Sector: Forward, March

With Court Ruling, Industry Proceeds With Plans for Law's Implementation; One Hitch: Medicaid

By

Anna Wilde Mathews

Updated June 29, 2012 3:30 p.m. ET

The Supreme Court's decision largely upholding the health-care law lifts the cloud of uncertainty over the health-care industry and employers and puts companies back on a course to prepare for the law's implementation over the next two years.

"We'll just continue to do what we've been doing," said Michael B. McCallister, chief executive of insurer Humana Inc.

The Supreme Court's suprise decision to let states opt of out the health overhaul's Medicaid expansion could reshape how the law expands insurance coverage to the poor. Tom Burton has details on The News Hub. Photo: Getty Images.

The coming election and expected budget negotiations could throw off more changes. And the weakening of the law's expansion of Medicaid, which will now depend in part on states' choice to participate, creates some new ambiguity. But states will come under strong pressure to accept the expansion, which the federal government will fund completely in its first years.

To prepare for the overhaul, health-care providers and insurers had already embarked on a wave of structural changes, consolidating to cut costs and position themselves for the law's main provisions. These steps would have been difficult to undo had the law been struck down.

Joan West receives a checkup from Dr. Lisa Vinci at the University of Chicago Medicine Primary Care Clinic in Chicago on Thursday.
Reuters

"We're full steam ahead" on efforts to create new partnerships with health-care providers, said David M. Cordani, Cigna Corp.'s chief executive. The decision "may provide some acceleration within the industry."

How Ruling Affects Industry

Insurers

Health insurers will face provisions that carry both promise and problems.

The biggest benefit comes with the expected expansion of the insured. If the law had remained unchanged, that would have been more than 30 million people by 2022, according to the Congressional Budget Office. Many will be purchasing plans from private insurers through the law's new exchanges, supported by subsidies from the federal government for those whose incomes are 400% of the poverty level or below.

The Supreme Court found one part of the health-care law unconstitutional, saying its expansion of the federal-state Medicaid program threatened states' existing funding. Jess Bravin has details on The News Hub.

On D.C. Bureau, Rep. Chris Van Hollen handicaps how the GOP's latest assault on the health-care law will play out, and shares his playbook to help beleaguered Democrats win over the law's skeptics. Photo: Getty Images.

At least 16 million of those people were expected to gain coverage through the law's expansion of Medicaid. Some of that growth is now in question, as the court struck down the law's penalties on states for not participating. But the Medicaid expansion still represents a significant opportunity for insurers, even if some states decline to add the new beneficiaries.

"On balance, more states than not will participate," said John C. Molina, chief financial officer of Molina Healthcare Inc., which manages care for 1.8 million Medicaid participants in 10 states.

Jon Dinesman, senior vice president of Centene Corp., another Medicaid managed-care operator, said other engines driving revenue for the managed-care Medicaid business remain intact, including the push to coordinate the care of "dual eligibles," people who qualify for both Medicare and Medicaid.

Still, the law carries significant risk for insurers, and the court decision will likely unleash renewed lobbying for changes to aspects they have long disliked. Many have argued that the individual penalty in the law for not buying health insurance, now defined as a tax, would need to be strengthened to keep healthy people in the insurance pool and protect against spiraling premiums.

A noisy and divided crowd waited on the steps of the Supreme Court Thursday for the contentious health care law ruling. As WSJ's Neil Hickey reports, the 5-4 decision to largely uphold the Affordable Care Act was greeted with shock and celebration.

The penalty is "weak," said
Mark T. Bertolini,
chief executive of Aetna Inc., and it will be necessary to "make sure the individual mandate has some teeth." Possibilities include penalties for people who choose to belatedly sign up for newly available insurance options, he said.

Also squeezing insurers is the requirement that they spend at least 80% of premium dollars from individuals and small companies, and 85% of those from big employers, on health-related costs.

—Anna Wilde Mathews

Hospitals

Hospitals have been engaged in a spree of consolidation and strategic investment in outpatient clinics and information technology. The aim is to curb costs and gain more heft to negotiate with payers, as well as to prepare for the health-care law, which brings deep cuts in government payments along with the promise of newly covered customers.

The industry supported the health legislation two years ago, in a bet that the flood of new business would help it weather the $155 billion in cuts it will face, according to American Hospital Association estimates.

"We'll have 32 million potential customers who will come in, get treatment and pay," said
Alan Miller,
chief executive of Universal Health Services, a King of Prussia, Pa., company that runs 24 acute-care hospitals around the country. "Previously, they got good treatment and said, 'We can't pay,' " he said. Mr. Miller waved off the cuts, saying, "we will make it up in volume."

More

The ruling boosted stocks of hospital chains such as Universal, Tenet Healthcare Corp., HCA Holdings Inc. and Community Health Systems, which closed Thursday with gains ranging from 5% to 11%. Publicly traded hospitals represent only a fraction of the nation's nearly 5,000 facilities.

Many hospital executives said they were still analyzing the court's ruling on the expansion of Medicaid, which could curb the expected growth in covered patients in some markets.

Some executives also remain skeptical that the influx of paying patients will materialize. "The tax for not having health insurance is so small" that many may choose to go uninsured, said
Barry Arbuckle,
chief executive of MemorialCare Health System, which runs six Southern California nonprofit hospitals.

—Christopher Weaver

Drug Companies

The pharmaceutical industry largely supported the 2010 overhaul, which is expected to help millions more Americans afford medicine by adding them to the rolls of the insured, and industry executives have indicated they will continue to plan for the law's implementation.

"We know what that road looks like," said
John Lechleiter,
chief executive of Eli Lilly & Co. and board chairman of the Pharmaceutical Research and Manufacturers of America, an industry trade group, in an interview early this month.

Among the provisions that most affect drug makers: the launch of lower-priced versions of expensive and complex medicines known as biologics. Certain companies will lose sales from the introduction of these rival products over the next few years, but drug giants including Amgen Inc., Pfizer Inc. and Novartis AG have been aiming to take advantage of the opportunity, developing so-called biosimilars of their own.

Some analysts estimate that any increased sales from the bigger roster of insured people would be offset by the roughly $80 billion in fees and rebates that companies agreed to pay over 10 years to help fund the plan.

The industry paid $2.5 billion in fees last year and is slated to pay $2.8 billion this year, according to Moody's Investors Service.

Since the overhaul was enacted in 2010, companies have spent more than $3.5 billion discounting the cost of drugs for elderly people paying out of pocket in the Medicare Part D prescription-drug benefit's coverage gap, known as the doughnut hole, according to the Centers for Medicare and Medicaid Services.

"We thought the law is negative" for drug makers, said Michael Levesque, a pharmaceutical analyst at Moody's.

—Jonathan D. Rockoff

Employers

Many employers said the ruling isn't likely to change their plans for providing insurance coverage to workers and for overall spending—though some, particularly low-wage firms like retailers and restaurants, said it leaves them to absorb a cost that could chill hiring.

Firms with 50 or more workers will still have to pay a penalty that starts at $2,000 per full-time employee in 2014 if they don't provide insurance or their plan doesn't meet a standard. Ascena Retail Group Inc., which runs stores under the Dress Barn, Justice and Lane Bryant banners, has 38,000 part-time workers, and depending on how the U.S. defines "full-time," it could be forced to foot the bill for workers who hadn't been eligible previously for insurance, said Isabella Spiegel, Ascena's vice president of corporate benefits and insurance.

"It will be the cost of doing business in the U.S., and it will be difficult for everyone," Ms. Spiegel said.

Workers will be able to buy plans in new exchanges set to open in 2014, and many lower earners can claim insurance tax credits in those marketplaces. That has prompted some companies to consider whether it makes sense to stop offering coverage and instead funnel workers into the exchanges. Although the employer would have to pay a penalty, its costs would be lower since it wouldn't have to pay for insurance.

The court's ruling that states can choose not to comply with the law's Medicaid expansion could complicate decision-making for other employers that were betting some of their low-wage workers would get funneled into Medicaid under the law. Still, research suggests most companies will continue to provide insurance once the full law takes effect, with a handful of surveys showing that fewer than 10% of employer respondents are considering dropping coverage.

Brown-Forman Corp., maker of Jack Daniel's whiskey, said it has no plans to drop insurance coverage and pay the employer penalty in 2014. "We make health insurance available to all U.S. employees and will not change that practice," the Louisville, Ky., liquor company said.